ICBA Policy Resolutions for 2013
Track I: Legislation and Regulation
OVERDRAFT COVERAGE SERVICES
- ICBA strongly supports a consistent regulatory framework for overdraft payment services to facilitate compliance and understanding for community banks and their customers. A fragmented regulatory approach places community banks under different requirements and in some instances at a competitive disadvantage with other financial institutions. Moreover, a patchwork regulatory environment is confusing for consumers, because the services would be administered differently among financial institutions depending on specific bank agency requirements.
- ICBA strongly supports regulatory policy and oversight which does not impede community banks’ ability to offer a variety of overdraft payment services to meet their customers’ financial needs.
- ICBA strongly supports consumers retaining the ability to choose overdraft payment services that best fit their financial needs. Consumers should be fully informed about the terms, conditions and choices related to overdraft payment programs or any similar services provided by their bank.
- ICBA strongly urges that any legislation, rule or guidance distinguish between discretionary or ad hoc overdraft payment and automated overdraft payment programs. Discretionary or ad hoc programs – in which bank staff evaluates overdrafts on a case-by-case basis – are services that customers expect from their local bank and should not be subject to the same rules and limitations as automated programs, which are often developed and operated by third-parties.
- ICBA adamantly opposes any new legislation, rule or guidance that would:
- impose fee restrictions, caps or price controls;
- mandate a particular order in which community banks post transactions to a consumer’s checking account;
- dictate unreasonable and burdensome customer contact requirements;
- impose underwriting requirements and regulate the service as a credit product; or
- result in unintended consequences such as an increase in the number of returned check and/or ACH debit transactions for consumers.
Community banks offer a variety of overdraft payment programs in which the bank analyzes an overdrawn account for payment, and alternative services, in which customers can choose to transfer funds from a designated account or line of credit or to advance funds from a short-term, small-dollar loan to avoid an overdraft.
Increased and ongoing regulatory scrutiny of consumer overdraft payment programs has affected many aspects of how community banks offer these services to consumers, as well as how they monitor and manage these services.
In June 2012, ICBA released the ICBA Overdraft Payment Services Study (Study). The study assesses community bank practices regarding overdraft payment services and gauges consumers’ checking account practices and preferences related to overdraft payment services (regardless of financial institution type). The survey of 575 community banks sheds light on how community banks manage consumer overdraft payment services, how they control their risk exposure to overdrawn accounts, and whether they meet the account overdraft coverage needs of their customers. Among that survey’s notable findings:
- Community banks are transparent in their disclosures regarding features of their overdraft payment programs and inform customers of alternative services.
- Community banks have policies and practices in place to manage their risk and ensure safety and soundness.
- Community banks structure transaction posting to minimize potential consumer overdrafts and the related fees.
- Community banks provide reasonable overdraft fees and de minimis waivers to avoid excessive fees.
- Increased regulatory scrutiny during the past two years has limited community bank overdraft income.
ICBA’s survey of 3,000 consumers (representing a random sampling of the U.S. banking population), reveals:
- Most consumers understand the potential consequences of returned payments and want important transactions paid by their financial institution (all fees being equal) even if those transactions result in an overdraft.
- Consumers using overdraft payment programs are among the most knowledgeable of alternative services to avoid overdrafts.
- Consumers who use overdraft payment programs prefer them to other short-term funding options.
- Most consumers avoided overdrafts in the previous 12 months.
- Frequent account monitoring does not deter overdrafts.
- Consumers who use overdraft services are more likely to take out a payday loan.
- A consumer’s choice of financial institution makes a difference.
Overly burdensome legislation and regulation will hurt consumers. Attempts to impose price controls or caps on the number of overdraft fees a bank may assess on a consumer would cause banks to reject more transactions that would create a negative balance in an account – doing a disservice to the consumer and placing new burdens on check processors and payment systems that would have to handle returned checks. This alternative for a consumer – merchant returned check fees, possible credit report and check verification system blemishes, collections hassle, embarrassment, and the potential reliance on payday lenders – is far worse than incurring an overdraft fee. Any further legislative, rulemaking or agency directives should instead focus on consumer financial education and effective account management.
Staff contacts: Elizabeth Eurgubian, Viveca Ware, Cary Whaley
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